As the industry gradually exits the Great Recession and the manufacturers return to profitability, auto dealers are looking at facility upgrades, some voluntary, but others required. The extension of the tax benefits, passed late in 2010, included incentives that can alleviate the burden of facility improvements.
Construction of a new facility or improvements to an existing one might entitle you to utilize the recent depreciation incentives, which include the following:
- The Section 179 (expensing of capital assets) limit increased to $500,000 for the tax years 2010 and 2011. For qualified expenditures in excess of $2,000,000, the benefit begins to phase-out on a dollar for dollar basis.
- A 100% bonus depreciation deduction allowed for qualified investments made after September 8, 2010 and before January 1, 2012.
- A 50% bonus depreciation deduction allowed for assets placed into service after December 31, 2007 and before January 1, 2013.
To take maximum advantage of these benefits, the facility involved must meet certain criteria to be considered to be eligible. One way to take advantage of the current and former depreciation incentives is to undertake a cost segregation study (CSS) and identify the eligible portions of the facility.
A CSS is an analysis of all building construction and improvement costs which properly classifies the costs into the correct recovery periods for depreciation purposes. For example, rather than depreciating the entire cost of a building over 39 or 27.5 years, portions of the building can be depreciated over 5, 7 and 15 years with an engineering-based CSS.
A CSS performed on real estate acquired or constructed in previous years can identify those costs which might be eligible for shorter-class lives, and therefore result in the utilization of the former bonus depreciation incentives. This adjustment to correct depreciation allowed versus the depreciation taken on a prior-year tax return can be deducted on your current-year tax return. Keep in mind the following incentives and dates:
- 30% bonus depreciation from September 11, 2001 to May 5, 2003
- 50% bonus depreciation from May 6, 2003 to December 31, 2004
For more information, please contact Steven A. Barber at email@example.com.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.